MAY 28, 2020

By Sukriti Das, Joint Partner, Lakshmikumaran & Sridharan

1. Introduction:

IN 2017, a new Indirect Tax Regime was introduced in the nation namely GST. Since it was a transition from the earlier tax regime to new tax regime, the Central Goods and Services Tax Act, 2017 (CGST Act) included transitionary provisions in Section 140, which permitted a registered person to carry forward the accumulated CENVAT of the previous regime into the electronic credit ledger under GST. In pursuance of Section 140 of the CGST Act, Rule-117 prescribed the manner of taking credit by way of filing a declaration in Form TRAN-1 and imposed a time limit of 90 days from the appointed date. The prescribed date was extended several times since some taxpayers were unable to file the TRAN-1 form due to technical glitches, while other faced trouble in keeping up with the sudden change in compliance and reporting. ¹ Multiple taxpayers complained of low bandwidth and despite several attempts on the GST network, they were unsuccessful in filing the statutory GST TRAN-1 Form online. In the aftermath, multiple complaints were filed and an IT Grievance Redressal Committee was constituted. ² Bulk of cases being unresolved approached the court. The Government was responsive in acknowledging the technical difficulties faced by the taxpayers and introduced Sub-rule (1A) to Rule 117 of the CGST Rules. ³ By virtue of this insertion, the time limit for filing Form TRAN-1 was extended where the declarations could not be filed owing to "technical difficulties" faced by the taxpayers. Undoubtedly, the time limitations under Sub-rule (1A) of Rule 117 was successively extended. ⁴

2. Approach of the Judiciary so far:

Despite the Departments effort to resolve issue with the creation of IT Grievance Redressal Committee there were still abundance of taxpayers who did not get any effective redressal. Such taxpayers took recourse to High Court under Article 226 of the Constitution of India. In the matter of transfer of credit, the approach of the courts was observed to be leaning towards the taxpayers wherein the High Court directed the Department to open Form TRAN-1 portal. ⁵ The understanding followed by the High Courts in numerous decisions chiefly was based on the concept that Credit is a vested right of the taxpayer and was saved under the GST regime ⁶. Though, few other High Court took a contrary view that CENVAT Credit is a concession and not an indefeasible vested right. The fact that the GST regime was presently at a nascent stage and both the Department as well as the taxpayers were getting accustomed to this change, the benefit thereof was usually granted to the taxpayers.

3. Credit: a vested right and associated jurisprudence.

There exists long standing jurisprudence by the courts, that holds credit as an indefeasible vested right of the taxpayers. ⁷ This understanding has remained unfettered ever since the transition of MODVAT regime into the Excise regime. The courts have on numerous occasions reaffirmed this understanding and has applied the same with respect to the CENVAT credit transfer into GST regime too. ⁸ It was also recently observed by the Hon'ble Madras High Court that even under the old taxation laws, it was a settled position that substantive input credits cannot be denied or altered on account of procedural grounds. ⁹

Further it has been enunciated by the Hon'ble Supreme Court in VKNM Vocation Higher Secondary School v. State of Kerala [70 (2016) 4 SCC 216], that a vested right can be taken away by a subsequent enactment if such enactment specifically provides so in express words or by necessary intendment. This would imply that in absence of express provision in the CGST Act taking away the vested right of the taxpayer, the taxpayers are entitled to transfer the accumulated CENVAT credit to the new GST enactment.

4. Purpose of Repeal & Savings provisions and Transitional Provision :

With the introduction of the new regime in 2017, the entire indirect tax code in India was revamped. While the new code was supposed to supersede the old laws, however the same was to be done in a phased manner and it was also necessary to draw a distinction between what is "preserved" from previous law and what is dropped. For this purpose, the Repeal & Saving provision and Transitionary provisions were kept handy. Ideally, the purpose of a transitionary provision is to "regulate the coming into operation of [an] enactment and (where necessary) modify its effect during the period of transition" ¹⁰ Under the GST Act, such transitional provisions are contained in Section 139 to Section 142 which unfortunately fell short to some extent. Insufficiencies in Form GST TRAN-1 was the most obvious issue faced by the taxpayers. On the other hand, the Repeal and saving provision is a provision which intends to narrow the effect of the enactment to which it refers so as to preserve some existing legal provision or right from its operation. ¹¹ Under the GST Act, the Repeal & Savings provision is contained in Section 164. The interplay of the two provisions had interesting repercussions in relation to transfer of Credit since the same is "saved" under Section 164 being a vested right under the unrestricted Acts ¹², and is "regulated" through the transitionary provisions. The Courts in this regard have previously laid down that where credit are saved as a vested right, then in absence of specific mention of exercising powers under the procedural law, credit would not lapse. ¹³ An important issue that, however, remained unanswered until recently was: despite being a "vested right" of the taxpayer whether the ungenerous time limitation on transition of CENVAT credit provided under Rule 117 of the CGST Rules, 2017 was justified?

5. Present position:

The Hon'ble Delhi High Court recently in the case of Brand Equity Treaties Ltd. v. Union of India ¹⁴ read down Rule 117 of the CGST Act as directory in nature and held that non adherence to the deadline would not result in forfeiture of rights. It was further clarified that in absence of specific provision under the act, the residuary provision of the Limitations Act would apply and granted 3 years limitation from the date of effect. The reasoning of the court is summarised below:

(a) Protection under Article 300A: In a Previous Delhi HC judgement ¹⁵ Credit standing in favour of the assessee was held to be a vested property right protected under Article 300A of the Constitution of India. The legislature too recognised this existing right by protecting the same and allowing its migration into the new regime. By virtue of Article 300A, Credit could not be taken away merely by way of a delegated legislation by framing rules in the absence of any overarching provision in the GST Act.

(b) Case of Excessive Delegation: The court observed that phrase "In the manner prescribed" provided in Section 140 of the CGST Act, 2017 is limited in relation to a registered person's entitlement to carry forward the credit and the requisite procedure thereof. The only substantive limitation on the right to carry forward the CENVAT credit is contained in the proviso to Section 140(1). The prescribed substantive limitation therein does not exhibit any time-limit. In absence of a substantive limitation to that effect, the subordinate legislation could not prescribe such a time limitation.

In this regard, Rule 117 presently stands directory in nature and credit can be transitioned in the GST regime within a period of three years from the appointed date. There were conflicting judgements by Courts on this issue where the Hon'ble Gujarat High Court in Willowood Chemicals case & Hon'ble Bombay High Court in Nelco Ltd. case held Rule 117 of the CGST Rules, 2017, as intra vires the Act. ¹⁶ Subsequently, the Hon'ble Gujarat High Court gave a favourable ruling in Siddharth Enterprises case, similar to the one rendered by Hon'ble Delhi High Court in Brand Equity Treaties case, reading down Rule 117 of the CGST Act, 2017 as directory in nature. ¹⁷ Thus, the effect of Willowood Chemicals case was neutralized by the same High Court in M/s Siddharth Enterprises vs. Nodal Officer.

While momentarily there appears to be some consensus among High Court another interesting judgement was rendered by the Hon'ble Rajasthan High Court in Shree Motors case where the court relied on one of its previous judgements, holding Rule 117 of the CGST Rules as intra vires ¹⁸ and directed the petitioner to establish evidence of technical difficulties faced by him. Similar observation was made by the Hon'ble Bombay High in Nelco Ltd. case, which is, not only taxpayer burdening but is in direct conflict with the observations of the Hon'ble Delhi High Court in Brand Equity Treaties case, where the court acknowledged the difficulty faced by the taxpayers and allowed relief even to those tax payers who had been unable to file the TRAN-1. Perhaps at this point, it is safe to say the even though the Brand Equity Treaties judgement is a cause of great joy for the taxpayer, in the larger scheme of things there is absence of permanent authoritative clarity on the subject.

Another interesting addition to this discussion can be the judgement rendered by Hon'ble Punjab & Haryana High Court ¹⁹ where the Hon'ble High Court placed reliance on the Siddharth Enterprise case and allowed the respondent to carry forward the unutilized credit. Subsequently the Department filed an SLP against this order in the Supreme Court and the same presently stands rejected. ²⁰

6. Further directions and Aftermath :

The Hon'ble Delhi High Court in Brand Equity Treaties case ²¹ further directed the Department to publish the judgement on its website for the benefit of those taxpayers who have so far been unsuccessful in filing Form TRAN-1 and encourage them to do so on or before 30.06.2020. This judgement for many taxpayers came as a sight for sore eyes since it is an authoritative taxpayer leaning pronouncement.

What remains somewhat a matter of concern for the taxpayers is the recent amendment in Section 140 of the CGST Act by virtue of Section 128 of the Finance Act, 2020, inserting the phrase "within such time" as may be prescribed, thus delegating the power to the executive to prescribe time limit for filing TRAN-1. This effectively will have grave ramifications since by virtue of this addition the mandating of a substantive provision as laid down in the Brand Equity judgement will be fulfilled and the time limit prescribed in Rule 117 of the CGST Rules will become a matter of mandate, retrospectively w.e.f. 01.07.2017. It is crucial to note that the Finance Bill, 2020 received Presidential Assent on 27th March 2020 whereas the Hon'ble High Court's decision in the Brand Equity Treaties judgement was reserved on 2nd March' 2020 and pronounced on 5th May 2020. The aforesaid amendment has been notified vide Notification No. 43/2020-Central Tax dt. 16.05.2020 and has come into effect from 18.05.2020. In this regard one can only wonder if the much celebrated Brand Equity judgement will exist to be a short lived pronouncement.

7. Conclusion:

The Brand Equities judgement ²² came as a reason of celebration of the taxpayers. A very crucial aspect of this judgement was the deep acknowledgement of taxpayer grievances factoring issues like: an absolute novel system of accounting, reporting, credit claiming and payment or low bandwidth and lack of computer knowledge and skill. This compliance issue was also evident in cases of huge corporations that were capable of seeking professional help and in this regard one could only consider the plight of small enterprises and businesses. Throughout this entire period, GST portal itself proved to be more of a liability than a benefit. The Hon'ble Delhi High Court thus gave a well-reasoned decision and did complete justice to the rights of the taxpayers by providing some clarity on laws that presently offers very little set jurisprudence while has abundance of debatable grey areas.

However, despite of it all what remains to be seen is how this decision is received by the Department keeping in mind the recent amendment in Section 140 of the CGST Act by virtue of Section 128 of the Finance Act, 2020. This ever-growing tussle between the taxpayer and the revenue will perhaps create some instability in duration of the entire discourse however the same perhaps will provide some intriguing questions to ponder upon.

[The views expressed are strictly personal.]

¹See CBEC Order No. 3/2017 dt. 21 Sept 2017 (TRAN-1 Deadline Extension till 31.10.17); CBEC Order No. 2/2017 dt. 18 Sept. 2017 (TRAN-1 Revision deadline Extension 31.10.17); CBEC Order No. 7/2017 dt. 28 Oct. 2017 (TRAN-1 Deadline Extension till 30.11.17); CBEC Order No. 8/2017 dt. 28 Oct 2017 (TRAN-1 revision deadline Extension till 30.11.17); CBEC Order No. 9/2017 dt. 15 Nov.17 (TRAN1 deadline Extension till 27.12.17); CBEC Order 10/2017 dt. 15.11.17 (TRAN-1 Revision deadline extended till 27.12.17);

² See Circular No. 39/13/2018-GST dt. 3rd April, 2018.

³ Vide Notification 48/2018-CT dt. 10 Sept, 2018.

⁴ See CBEC Order No. 4/2018-GST dt. 17 Sept 2018 (TRAN-1 Deadline Extended till 31.01.19 under Rule 117(1A)); CBEC Order 1/2019-GST dt. 31 Jan 2019 (TRAN-1 Deadline Extended till 31.03.19 under Rule 117(1A)); CBEC Order 1/2020-GST dt. 07 Feb 2020 (TRAN-1 Deadline Extended till 31.03.20 under Rule 117(1A)).

⁵ See Adinath Industries v. Union of India [2019-VIL-526-DEL]; Adfert Technologies Pvt. Ltd. v. Union of India. - 2019-TIOL-2519-HC-P&H-GST; Afran Technology Pvt. Ltd., Asiad Paints Ltd. v. Union of India - 2020-TIOL-16-HC-KAR-GST; Gillette India Ltd. v. Union of India - 2020-TIOL-902-HC-DEL-GST; Jakap Metind Pvt. Ltd. v. Union of India - 2019-TIOL-2586-HC-AHM-GST; A.F. Babu v. Union of India - 2020-TIOL-182-HC-KERALA-GST; Tara Exporters v. Union of India [2019-VIL432-MAD]; Bhargava Motors v. Union of India - 2019-TIOL-1060-HC-DEL-GST; Blue Bird Pure Pvt. Ltd. v. Union of India - 2019-TIOL-1564-HC-DEL-GST

⁶ See Section 174(2)(c) of CGST Act, 2017.

⁷ See Elcher Motors Ltd. vs. Union of India - 2002-TIOL-149-SC-CX-LB

⁸ Supra Note 6.

⁹ W.P(MD) No. 18532 of 2018, [Judgement Dated 10.09.18 (Madras High Court, Madurai Bench)]

¹⁰ Halsbury's Laws of England (LexisNexis 5 th Ed., 2012), Vol 96 at [694]

¹¹ Halsbury's Law of England (LexisNexis 5 th Ed., 2012), Vol 96 at [668

¹² See Section 174(2) clause (c), CGST Act, 2017.

¹³ See Tata Engineering and Locomotive Ltd. v. Union of India - 2004-TIOL-06-HC-MUM-CX; -2002-TIOL-2704-SC-MISC

¹⁴ - 2020-TIOL-900-HC-DEL-GST

¹⁵ See A.B. Pal Electricals vs. Union of India - 2019-TIOL-2930-HC-DEL-GST

¹⁶See Willowood Chemicals Pvt. Ltd. vs. Union of India - 2019-TIOL-1588-HC-AHM-GST; Nelco Ltd. vs. Union of India [2020 SCC OnLine Bom 437]

¹⁷ See M/s Siddharth Enterprises v. Nodal Officer [2019-VIL-442-GUJ]

¹⁸ See M/s Shree Motors vs. Union of India - 2020-TIOL-924-HC-RAJ-GST

¹⁹ Adfert Technologies Pvt. Ltd. vs. Union of India - 2019-TIOL-2519-HC-P&H-GST

²⁰ See Union of India vs. Adfert Technologies Pvt. Ltd. [SLP No. 4408/2020, Order dated 28.02.20] - 2020-TIOL-64-SC-GST

²¹ Supra Note 11.

²² Supra Note 11.